Wednesday, July 14, 2010

Yesterday I started to read an article that Keynes wrote in the June, 1937 issue of The Economic Journal titled "Alternative Theories of the Rate of Interest". I haven't finished it yet, but in it he contrasts his view of the determination of the interest rate with that of the Swedes (specifically Bertil Ohlin), and a group of Keynesian sympathizers in London (John Robertson, who is credited with one of the earlier expositions of the paradox of thrift, and J.R. Hicks, the author of the IS-LM version of Keynes). Keynes differentiates himself from both groups, suggesting that his is a pure liquidity-preference version of the interest rate. I'm reading Roger Garrison right now, and Garrison critiques Hicks's version of Keynes on the interest rate and turns Keynes into a Swede. This passage seems to suggest that Keynes would argue Garrison misinterpreted him:

"There is, I think, a concealed difference of opinion, which is of very great importance, between myself and a group of economists who express themselves as agreeing with me in abandoning the theory that the rate of interest is (in Prof. Ohlin's words) "determined by the condition that it equalises the supply of and the demand for saving, or, in other words, equalises saving and investment." The object of the first section of this article is to bring this difference to a head.

The liquidity-preference theory of the rate of interest which I have set forth in my General Theory of Employment, Interest and Money makes the rate of interest to depend on the present supply of money and the demand schedule for a present claim on money in terms of a deferred claim on money. This can be put briefly by saying that the rate of interest depends on the demand and supply of money; though this may be misleading, because it obscures the answer to the question, Demand for money in terms of what ? The alternative theory held, I gather, by Prof. Ohlin and his group of Swedish economists, by Mr. Robertson and Mr. Hicks, and probably by many others, makes it to depend, put briefly, on the demand and supply of credit or, alternatively (meaning the same thing), of loans, at different rates of interest. Some of the writers (as will be seen from the quotations given below) believe that my theory is on the whole the same as theirs and mainly amounts to expressing it in a somewhat different way.' Nevertheless the theories are, I believe, radically opposed to one another. The following quotations will explain the point at issue."

I personally find Hicks's IS-LM framework useful, but perhaps that's because I'm not aware of a formal liquidity-preference-only version of Keynesianism.

Keynes also has an interesting footnote that emphasizes the fact that he deeply respects all the schools of thought he's differentiating himself from here. He writes:

"I must, however, take this opportunity to apologise at once if I have lead any reader to suppose that, as Prof. Ohlin seems to think (p. 234 above), I regard Prof. Hawtrey and Mr. Robertson as classical economists! On the contrary, they strayed from the fold sooner than I did. I regard Mr. Hawtrey as my grandparent and Mr. Robertson as my parent in the paths of errancy, and I have been greatly influenced by them. Imight also meet Prof. Ohlin's complaint by adopting Wicksell as my great-grandparent, if I had known his works in more detail at an earlier stage in my own thought and also I did not have the feeling that, Wicksell was trying to be "classical". As it is, so far as I am concerned, I find, looking back, that it was Prof. Irving Fisher who was the great-grandparent who first influenced my strongly towards regarding money as a "real" factor."